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Indigo Books & Music Inc.
Annual Information Form
For the fiscal year ended April 2, 2011
May 31, 2011
TABLE OF CONTENTS
CORPORATE STRUCTURE .................................................................................................... 1
Name, Address and Incorporation ....................................................................................... 1
Principal Subsidiaries .......................................................................................................... 1
GENERAL DEVELOPMENT OF THE BUSINESS ............................................................... 3
Three Year History .............................................................................................................. 3
DESCRIPTION OF INDIGO ..................................................................................................... 4
Overview of Business........................................................................................................... 4
Description of the Retail Business ...................................................................................... 5
Description of the Internet Business ................................................................................... 6
Description of Kobo Inc. ................................................................................................... 15
RISK FACTORS ........................................................................................................................ 20
DIVIDENDS ............................................................................................................................... 23
CONSTRAINTS ......................................................................................................................... 24
MARKET FOR SECURITIES ................................................................................................. 24
DIRECTORS AND OFFICERS ............................................................................................... 24
AUDIT COMMITTEE .............................................................................................................. 29
Composition of the Audit Committee and Relevant Education and Experience of
the Members ...................................................................................................................... 29
Pre-Approval Policies and Procedures .............................................................................. 30
External Auditor Service Fees ........................................................................................... 31
TRANSFER AGENT AND REGISTRAR .............................................................................. 31
EXPERTS ................................................................................................................................... 31
ADDITIONAL INFORMATION ............................................................................................. 31
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Indigo Books & Music Inc.
CORPORATE STRUCTURE
Name, Address and Incorporation
Indigo Books & Music Inc. (“Indigo”, the “Company”, “we”, “us” or “our” as the context requires)
was formed upon the amalgamation of Chapters Inc. and Indigo Books & Music, Inc. under the Business
Corporations Act (Ontario), pursuant to a Certificate of Amalgamation dated August 16, 2001.
Subsequently, Indigo was amalgamated with Chapters Online Inc. (“Chapters Online”) under the Business
Corporations Act (Ontario) pursuant to Articles of Amalgamation dated April 3, 2004, and with CCBC
Holdings (2001) Inc. and 1526656 Ontario Limited under the Business Corporations Act (Ontario),
pursuant to Articles of Amalgamation dated April 3, 2005. Previously, Chapters Inc. was formed upon
the amalgamation of Coles Book Stores Limited and FICG Inc., under the Business Corporations Act
(Ontario), pursuant to a Certificate of Amalgamation dated April 11, 1995. Indigo’s head and registered
office is located at 468 King Street West, Toronto, Ontario, M5V 1L8.
Chapters Online was incorporated under the Business Corporations Act (New Brunswick) by
Certificate of Incorporation effective July 23, 1999. In August and September 1999, Chapters Online
went public on the Toronto Stock Exchange (“TSX”), with Chapters Inc. retaining a 69.9% ownership
stake. On October 27, 2001, Indigo acquired all the issued and outstanding shares of Chapters Online not
already owned by Indigo. This transaction resulted in the issuance of 750,193 common shares of Indigo
to the holders of equity interests of Chapters Online. Thereafter, Chapters Online became a wholly
owned subsidiary of Indigo. Immediately following the acquisition, Chapters Online’s business was
incorporated into Indigo’s business. Pursuant to this transaction, Chapters Online filed Articles of
Continuance in Ontario on November 5, 2001. On April 3, 2004, Chapters Online was amalgamated with
Chapters Inc. and the online business is now integrated into the overall business.
Principal Subsidiaries
The following table sets forth the names of the principal subsidiaries (including limited partnerships)
of Indigo as of May 31, 2011, the percentage of voting shares (or interest) owned by Indigo and the
jurisdiction of incorporation or continuance of each such subsidiary (or limited partnership).
Name of Subsidiary Percentage Owned Jurisdiction of Formation, Incorporation
or Continuance
Calendar Club of Canada Limited Partnership......................................................... 50.0% Delaware, USA Kobo Inc. ................................................................................................................ 51.4% Ontario, Canada
Kobo Inc. (“Kobo”) was incorporated in August 28, 2009 under the name Shortcovers Inc. under the
Business Corporations Act (Ontario). On December 4, 2009, the Company completed a name change
from Shortcovers Inc. to Kobo Inc. On December 14, 2009, Indigo transferred the net assets of
Shortcovers to Kobo Inc. in exchange for common shares of Kobo. Kobo’s corporate headquarters is
located at 135 Liberty Street, Suite 101, Toronto, Ontario, M6K 1A7. Kobo’s corporate website address
is www.kobobooks.com.
FORWARD-LOOKING INFORMATION
This document contains forward-looking information within the meaning of Canadian provincial and
territorial securities laws. All statements other than statements of historical facts included in this Annual
Information Form, including statements regarding the prospects of the industries in which the Company
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operates, future plans, expected financial position and business strategy of the Company may constitute
forward-looking information. The words “believe” “intend” and “expect” and other expressions of similar
import, or the negative variations thereof, and similar expressions of future verbs such as “will” are
predictions of or indicate future events and trends and identify forward-looking statements. Forward-
looking information is based on the reasonable assumptions, estimates, analysis and opinions of
management made in light of its experience and perception of trends, current condition and expected
developments, as well as other factors that management believes to be relevant and reasonable at the date
that such statements are made. The forward-looking information contained in this Annual Information
Form is presented for the purpose of assisting the Company’s security holders in understanding its
financial position and results of operation as at and for the periods ended on the dates presented and the
Company’s strategic priorities and objectives, and may not be appropriate for other purposes. Although
the Company believes that the expectations reflected in such forward-looking statements are reasonable,
such statements involve risks and uncertainties, and undue reliance should not be placed on such
statements. Certain material factors or assumptions are applied in making forward-looking statements,
and actual results may differ materially from those expressed or implied in such statements. Information
about material factors that could cause actual results to differ materially from expectations and
information about material factors or assumptions applied in making forward-looking statements may be
found in this document under “Risk Factors” as well as under “Risks and Uncertainties” in the
Company’s Management Discussion & Analysis (53 weeks ended April 3, 2010 to the 52 weeks ended
April 2, 2011) (the “MD&A”) and elsewhere in the Company’s filings with Canadian securities
regulators. The Company does not undertake any obligation to update publicly or to revise any of the
forward-looking information contained or incorporated by reference in this document, whether as a result
of new information, future events or otherwise, except as required by law.
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GENERAL DEVELOPMENT OF THE BUSINESS
Three Year History
It has been 14 years since Indigo launched its first superstore with a commitment to enriching
Canadian’s lives through books and complementary products. Much has changed since then in both our
industry and the larger media environment that serves our customers. The online channel has expanded
dramatically, offering consumers an increased number of titles at a lower cost than a traditional
bookstore. More recently, the digital channel has provided consumers with a completely new reading
platform with instant accessibility, huge selection and lower costs.
Over the past three years, Indigo has invested directly into both of these high growth channels, but
has also focused on advancing the core retail business through adapting our physical stores, improving
productivity, and driving employee engagement.
The key strategies are outlined below.
1. Adapting our Physical Stores
To ensure that the offerings in our physical stores are rich and compelling, the Company is working
to expand its product mix, is introducing full-line toy stores to its large format locations and is developing
its own gift and lifestyle products to further expand its gift and lifestyle offering.
After successfully piloting the expansion of its toy offering Indigo began full expansion of the toy
business in fiscal 2009. At the end of fiscal 2011, the Company had full-line toy stores in 53 of its large
format stores with the remaining superstores showcasing expanded toy offerings.
Through fiscal 2010 and fiscal 2011, the Company took steps to establish its product development
capability to expand its proprietary gift and lifestyle merchandise. This initiative is part of the
Company’s focus on providing customers with increasingly meaningful and life enriching merchandise
while improving operating margins. To support this initiative, Indigo opened a new design office in New
York in fiscal 2011, and proprietary merchandise developed by this team is scheduled to be in stores in
fiscal 2012.
2. Driving Productivity Improvement
While a key focus in the Company’s retail business is on evolving to meet the emerging needs of
customers, the Company is also focused on driving productivity improvements. The challenge for the
Company is to continually look for innovative ways to drive costs down while improving what we deliver
to customers. For this reason the Company has implemented a number of key initiatives related to
improving productivity. In particular, the Company has focused on two major supply chain productivity
initiatives designed to further reduce costs, deliver improved operating margins and improve service to
customers.
In fiscal 2010, a project was approved to open a new distribution facility and to deploy a new
warehouse management system to serve as the fulfillment centre for the Company’s online business. The
162,800 square foot facility opened in September 2010 and currently supports an increased assortment of
books and general merchandise product for online customers.
The second phase of this project to upgrade the Company’s existing retail distribution facility to more
efficiently support the retail stores began in January 2011. The project scope will replace the warehouse
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management system and upgrade the material handling equipment. This project is scheduled for
completion in fiscal 2012.
3. Employee Engagement
Indigo’s strategic efforts over the past three years have included a focus on employee engagement.
To help drive employee engagement over the last three years, Indigo invested in training and
development, and has worked to improve overall communication throughout the Company. The
Company will also launch a talent management software tool along with enhancements to existing human
resources reporting tools in fiscal 2012. The Company realizes that sustaining high levels of employee
engagement is a day in and day out, year over year responsibility and, accordingly, expects to continue to
commit resources to specific initiatives designed to make Indigo one of the best places to work.
4. Digital Initiative
Fiscal 2010 marked the true beginning of the digital age for books and Indigo is at the forefront of
this new world. Shortcovers, Indigo’s digital initiative, launched in February 2009 as a new digital
destination, www.shortcovers.com, offering online and mobile service with instant access to books,
articles and blogs. On December 14, 2009, Indigo transferred the net assets of Shortcovers to a new
company, Kobo in exchange for common shares of Kobo. The Shortcovers website was changed to
www.kobobooks.com. As at May 31, 2011, Indigo maintains a controlling interest in Kobo.
While books have been available in electronic form for many years, awareness of this format and the
availability of new devices that enable eReading are growing. As Canadians begin to explore this new,
electronic reading experience, Indigo intends to position itself as the go-to destination in Canada for
eReading. Through its partnership with Kobo, Indigo provides an eReading experience to its customers,
allowing them to purchase eBooks and read them on an evolving selection of smartphones and eReaders.
5. Online Development and Redesign
Reshaping Indigo’s offering to include expanded gift and lifestyle product, full line toy shops, and
Kobo and Kobo accessories also involves the reshaping of our online experience. The online redesign
includes changes in merchandising to add more gift, lifestyle and toy product and changes in the
Company’s approach to communicating online. The creative, architectural, and development work for the
online redesign began in 2010 and will continue through 2011 and 2012.
To further improve the online customer experience, a new distribution centre dedicated to the online
business, opened in September 2010.
DESCRIPTION OF INDIGO
Overview of Business
Indigo is the largest book, gift and lifestyle, and specialty toy retailer in Canada. Indigo operates in
all provinces and sells books and book-related products, including newspapers, magazines, audio books,
stationery, music CDs, videos, DVDs, educational and entertainment-oriented software, toys and gifts
under the names Indigo, Chapters, the World’s Biggest Bookstore, Coles, IndigoSpirit, SmithBooks and
The Book Company, with one store under the banner, Pistachio. The online division,
www.chapters.indigo.ca, features books, eBooks, toys, gift and lifestyle products. The Company also has
a 50% interest in Calendar Club of Canada Limited Partnership, which operates seasonal kiosks and year-
round stores in shopping malls across Canada.
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Indigo is the majority shareholder of Kobo, a global eBook retailer.
The Company participates in a joint venture through a 50% equity ownership in the Calendar Club of
Canada Limited Partnership to sell calendars, games and gifts through seasonal kiosks and year-round
stores. Calendar Club of Canada Limited Partnership currently operates approximately 210 seasonal
calendar kiosks and inline game stores each year.
Description of the Retail Business
Indigo operates 97 superstores. Superstores are typically ten times the size of Indigo’s small format
stores, permitting them to carry a large title selection and provide an inviting ambience. Indigo opened
one new superstore between April 3, 2010 and April 2, 2011, located at Erin Mills Town Centre in
Mississauga.
Indigo operates 140 traditional small format stores under the banners Coles, SmithBooks, and The
Book Company. In addition, there are nine small format stores which offer an expanded gift and paper
selection, operating under the banner, Indigospirit and one new concept store under the banner of
Pistachio. All small format stores are in shopping centres, street-front retail areas, airports, a hospital and
shopping concourses throughout Canada. The small format stores are built on service, convenient
locations and selection. Indigo continues to pursue a small format store rationalization program whereby,
as leases come up for renewal, Indigo closes under-performing stores, as well as small format stores that
will be impacted by the opening of a superstore in their markets. At the same time, it is management’s
belief that profitable opportunities exist within certain markets for the small format stores.
Superstores
Indigo operates its superstores under the names Indigo Books & Music, Indigo Books • Gifts • Life,
Indigo Books • Gifts • Kids, Chapters, and the World’s Biggest Bookstore in all ten provinces of Canada.
These superstores are typically about ten times the size of Indigo’s small format stores. In the 52 weeks
ended April 2, 2011, these stores accounted for sales of $667.6 million, representing 65.6% of total
revenues. In the 53 weeks ended April 3, 2010, these stores accounted for sales of $670.5 million,
representing 69.2% of total revenues. Indigo superstores are designed to be a destination for book
consumers, offering an environment that is conducive to browsing and that becomes a part of the local
community. Management believes that, as a result of superior title selection, ambiance, convenient hours
(generally, 10:00 a.m. to 10:00 p.m., seven days per week), competitive pricing and knowledgeable staff,
Indigo is well positioned to maintain its status as the leading book superstore operator in Canada.
Large Title Selection. Indigo believes that superstore sales are driven by actual customer browsing
on-hand titles and by customers’ expectations that a desired title or subject will be in stock. Indigo’s
superstores offer a large selection of book titles, covering major and obscure subjects. Indigo has
computer kiosks in all superstores to give retail customers access to much the same inventory of books
that is available to its online shoppers.
Superior Store Design. Superstores are designed to encourage browsing for extended periods,
featuring wide aisles, comfortable seating, warm lighting and soft colours. Floor plans partition the stores
into manageable areas and lead customers to popular categories such as “fiction”, “kids” and “gift and
lifestyle”.
Real Estate. Indigo operates 97 superstores. The size of an Indigo superstore is dependent upon the
size of the local population and the potential draw of such a store, the demographics of the market, and
the availability of other locations. Currently, superstores range in size from 10,000 to 67,000 square feet,
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with the majority being between 20,000 and 30,000 square feet compared to an average of approximately
2,600 square feet for small format stores. The total superstore selling footage is 2,235,430 square feet.
All Indigo superstores are leased.
Small format Stores
Indigo operates its small format stores in all ten provinces and one territory in Canada under the
names Coles, Indigo, Indigospirit, SmithBooks and The Book Company. These stores are typically
located in retail shopping centres, street-front retail areas, major airports, a hospital and central business
districts. Coles is the leading shopping centre bookstore chain in Canada in terms of both sales and
number of stores. Indigo’s small format stores generated combined sales of $148.7 million in the 52
weeks ended April 2, 2011, representing 14.6% of total revenues. In the 53 weeks ended April 3, 2010,
these stores accounted for sales of $157.4 million, representing 16.3% of total revenues.
Convenience Shopping. Indigo’s small format stores typically carry approximately 8,000 titles,
covering a wide range of book categories, including new releases, bestsellers, mass market paperbacks,
trade books, bargain and remaindered books, audio books, calendars, newspapers and magazines. Stores
are generally open during the operating hours of the shopping centres in which they are located.
Small format stores rely heavily on impulse and walk-in business. Indigo believes that its recognized
national banner names are valuable in attracting walk-by traffic into its stores, and that its portfolio of
locations in prominent shopping centres, street-front retail areas, airports, a hospital and other core retail
locations across Canada is the most significant factor contributing to their ongoing sales performance.
Real Estate. Indigo operates 140 traditional small format stores under the banners Coles,
SmithBooks, and The Book Company. Additionally there are nine small format stores which have an
expanded gift and paper offering, operating under the banner Indigospirit. There were four small format
store closures and one small format store opening between March 30, 2008 and March 28, 2009, and five
small format store closures and no small format store openings between March 29, 2009 and April 3,
2010, and one small format store closure and no small format store openings between April 4, 2010 and
April 2, 2011
Indigo’s management believes that many of Indigo’s small format stores are located in geographic
areas that are too sparsely populated to support a superstore and, accordingly, that Indigo’s small format
stores will continue to provide a significant source of revenue into the future.
New Concept Stores
During the fiscal year ended March 28, 2009, Indigo opened two new concept stores under the
Pistachio banner. Pistachio offers a “good for you, good for the planet”, environmentally friendly
selection of kids and baby, home and lifestyle, and organic apothecary products for everyday use. During
the fiscal year ended April 3, 2010, Indigo closed one of the stores operating under the Pistachio banner
as the demographics of the location were not a match for the Pistachio offering. The Yonge & Eglinton,
Toronto street front location remains open. Certain Pistachio products are also sold in Indigo and
Chapters superstore locations.
Description of the Internet Business
Indigo operates www.chapters.indigo.ca, a leading Canadian destination for online shoppers. The site
features a large selection of books, audio books, music CDs, DVDs, toys, and gift and lifestyle
merchandise at Canadian prices, with a focus on products of interest to Canadians.
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In February 2009, Indigo also launched Shortcovers.com, a digital destination offering both an online
and mobile service to help booklovers find their next great read. Using the Shortcovers service, customers
can sample or purchase books, chapters, articles and other content for immediate download to mobile
devices they already own. On December 14, 2009, Indigo transferred the net assets of Shortcovers to a
new company, Kobo, www.kobobooks.com. For further information about Kobo, please refer to the
section entitled “Description of Kobo Inc.”.
Attracting Customers to the Website
Indigo uses a variety of different resources to attract customers to its website. The resources include:
our large opt-in database; paid and natural search; and affiliate marketing.
Indigo’s affiliate program allows other website owners to link to Indigo’s website and direct their
visitors to purchase products from Indigo. Each time a purchase is made by a visitor who has followed an
affiliate’s link, such affiliate receives a referral fee. Indigo’s website is also designed to allow affiliates to
establish links from their websites quickly and easily.
The online channel also supports our irewards loyalty program members. These members, who
represent our most loyal and valuable book buyers, are attracted to and supported by the website through
offers of additional discounts on books when shopping at our website. In early fiscal 2012, Indigo
launched a free, points-based loyalty program (plum rewards) as an alternative to the fee-based irewards
program. This new program is also supported by the online channel.
The Indigo Community, an online platform that combines the best of social networking with a set of
user generated content tools designed specifically for booklovers, also attracts customers to the
www.chapters.indigo.ca website. Indigo Community members are drawn back to the site through
triggered emails sent out in response to activity related to their participation in the Community, for
example, when a friend recommends a book to them.
Building Customer Loyalty
Indigo’s website promotes customer loyalty and repeat purchases by providing an online experience,
including the Community platform, which encourages customers to return frequently. Visitors to the
website are greeted with highlighted subject areas arranged in a simple fashion intended to enhance
product search and selection. Indigo offers numerous forms of content to enhance a customer’s shopping
experience, including cover art, synopses, annotations and reviews by other customers.
Other special features include bestseller lists, featured books, music and DVDs, themed presentations,
highlighted books by Canadian authors, along with video, audio and digital content. Indigo’s search
engine and sorting capabilities allow consumers to search or “browse” in an intuitive and easy fashion,
grouping products according to keywords, titles, authors, artists, actors, and more complex and precise
search tools. Indigo’s search engine is designed to produce accurate and meaningful results on virtually
every search.
The Community tool set allows members; to build a virtual bookshelf, music shelf, or DVD shelf;
join in or start up book clubs/groups; and create and comment on reviews, top ten lists, recommendations,
and posts. Each Community member may customize their profile based on personal preferences,
including the ability to restrict sharing information or content. This social networking community geared
to booklovers enhances the customer’s experience and encourages members to regularly return to the site.
8
Customer service and support are critical to establishing and maintaining long-term relationships with
customers. Indigo seeks to achieve frequent communications with, and feedback from, its customers in
order to improve customer satisfaction. It offers an email address and a toll-free telephone number to
enable customers to request information and to encourage feedback and suggestions. Indigo’s customer
service representatives are available by telephone five days per week year-round, and more frequently
during the holiday season. In addition, Indigo has customer service availability via email.
Indigo has designed its systems so that all transactions on its website are simple and secure. It allows
its customers to establish an account online, to store an address book, credit card information and
shipping preferences, which can be automatically re-used by customers on repeat purchases. All sensitive
customer information is encrypted, using advanced security systems, before it is sent to Indigo’s secure
server.
Indigo’s online site enjoys the benefit of Indigo’s large volume wholesale discounts from its “bricks
and mortar” retail stores. The online business does not always match the prices of all its competitors, but
merchandises effectively with a mix of price competitiveness and a wide selection of products, including
many bestseller books in hardcover that offer up to a 45% discount from publishers’ list prices. It
denominates its prices in Canadian dollars, which provides Canadian customers with certainty in
determining price.
Efficient Execution of Customers’ Orders
The ability to deliver products to customers efficiently is a critical factor in achieving repeat customer
purchases.
Consumers increasingly demand an assured in-stock position and fast delivery from online retailers.
In conjunction with the new Indigo Online Distribution Centre and outsourcing agreements with other
vendors, Indigo is able to provide a large number of books, music, DVDs, and toys, many of which are
available for shipment within 24 hours. It operates a virtual warehouse, whereby customer orders are
automatically transmitted to the Indigo Distribution Centre or other third party vendors, where they are
packaged and shipped to customers in accordance with their delivery specifications. The Indigo
Distribution Centre uses inventory control systems that update its inventory as orders are transmitted from
the website. Each customer receives an e-mail after placing an order that confirms that the order has been
received by Indigo and that lists details of their purchase. A second e-mail is sent to each customer,
confirming shipping and tracking information.
In September 2010, we opened a new distribution facility dedicated to the online business. This
facility is 162,800 square feet, and became operational ahead of our critical holiday season. This facility
supports an increased assortment of general merchandise business for the online business, as well as
books that we sell to our customers. Technology plays a key role in Indigo’s ability to communicate with
customers, as well as ensuring that orders are executed accurately and efficiently. Indigo expects to
continue to invest in technologies that will enable it to offer its customers a convenient and user-friendly
online shopping experience. Its website and e-commerce platforms use a component architecture design
that is fully redundant and rapidly scalable, allowing it to increase capacity easily as well as quickly
develop new applications, such as the Indigo Community and Indigo’s touch screen in-store kiosk
application. The Q9 Data Centre located in Toronto, Ontario, is the primary host location for Indigo’s
online operations. Indigo selected this facility because it is a best in class data centre facility, particularly
in terms of availability and security.
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eBooks
The emergence of the eBook category will have an impact on traditional book sales. Indigo
anticipates substantial growth in the eBook market in the coming years and expects to continue to invest
in eBook-related products and services to mitigate the erosion of physical book sales that may result.
On May 1, 2010, Indigo began selling the Kobo eReader in many of its superstore and small format
stores, and through its online and kiosk channels. While this device is an important part of an eReading
experience, Indigo will continue to support eReading via the Kobo service on a variety of devices
available to Canadians.
GENERAL
Purchasing
Indigo’s category managers have significant book industry experience, each specializing in one or
more subject areas, such as fiction, history, architecture and science. Indigo purchases its books from
more than 25 major publishers.
Currently, Indigo has an active list of approximately 500,000 titles. Each year, Indigo’s category
managers are presented with 60,000 to 75,000 new titles for consideration, of which approximately
25,000 are chosen for addition to Indigo’s title list, while approximately 20,000 to 25,000 titles are de-
listed annually. In addition, Indigo offers up to 2 million titles online through www.chapters.indigo.ca
and, when requested by a customer, Indigo will special order any book currently in print.
Approximately 85% of all titles Indigo purchases are returnable to suppliers for full credit. Indigo is
responsible only for transportation and labour costs associated with returning these books. Historically, it
has returned approximately 25% to 30% of the books purchased under these arrangements.
In order to offset the erosion of physical book sales and to maximize the average transaction revenues
generated from customers who visit either small format stores or superstores, Indigo is focusing on the
expansion of its toy, gift and paper programs. While the sale of books and book-related products are
expected to continue to be the single most important product line for Indigo, management believes that
the expansion of these other product lines will effectively add incremental revenues to existing store sales.
The purchasing activities for non-book products sold in Indigo’s retail locations and online at
www.chapters.indigo.ca are centralized at its home office in Toronto (Ontario). Pricing for non-book
products is determined at home office.
With the exception of gourmet food products, the majority of Indigo’s gift and lifestyle products are
foreign-sourced. The majority of Indigo’s toy product is sourced through North American vendors.
Indigo’s centralized purchasing team manages the sourcing process including product choices, the
management of product flow, product quality control and vendor selection.
To expand its existing gift and paper program, Indigo has established a product development team to
design and develop a proprietary product line. The product development team is based in New York.
Purchasing continues to occur from the head office in Toronto. Each quarter, the product is presented to
the merchant team via a line review that takes place in the Toronto office. The merchant team decides
which product will be carried across each of the channels represented under the Indigo banner.
In addition to expanding its gift and lifestyle program, Indigo has built an educational toy business as
an adjunct to its children’s books business. Management believes this is a strong long-term opportunity
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both in stores and online, and the Company expects to continue to add toy programs to existing stores and
to expand the online toy business.
The music business, specifically the retail compact disc business, has faced significant competitive
challenges over the last several years. Indigo has not been immune to this pressure. Indigo currently
offers “full-line” music/DVD departments in less than one-fifth of its superstores. Management is
actively seeking to reduce the Company’s exposure to this business. As part of the corporate strategy,
Indigo expects to continue to decrease the number of stores with a music/DVD section.
Indigo’s business is highly seasonal and follows quarterly sales and profit (loss) fluctuation patterns,
which are similar to those of other retailers that are highly dependent on the December holiday sales
season. A disproportionate amount of revenues and profits are earned in the Company’s third quarter. As
a result, quarterly performance is not necessarily indicative of the Company’s performance for the rest of
the year.
Information Systems
In the fiscal year ended March 28, 2009, Indigo deployed new kiosks into all of its superstores to
make it easier to search for products in store and to enable richer merchandising. Additionally, Indigo
deployed a new customer database to manage customer information and loyalty cards across all channels.
Finally, Indigo became compliant with the industry standard known as ISBN 13 moving to 13 digit
Industry Standard Book Numbers (“ISBN”).
In the fiscal year ended April 3, 2010, Indigo upgraded its enterprise resource planning (ERP) system
and introduced support for Chip and PIN credit cards. Indigo also introduced a new marketing system to
allow for personalized recommendations to be provided to Indigo customers, a continuation of the
customer loyalty program. Finally, Indigo introduced a new workforce management system to better
manage its retail workforce.
In the fiscal year ended April 2, 2011, Indigo invested in a number of Information Technology
initiatives. These initiatives include the opening of a new distribution centre to support the growth in the
Company’s online channel and the deployment of a new warehouse management system in that facility.
To support the growth of both the kids & lifestyle categories, the Company launched a new consumer
experience at chapters.indigo.ca and also integrated its online and kiosk channels with Kobo to sell
eBooks & eReaders. Indigo also launched a virtualization and consolidation program to reduce the
footprint of its information technology assets. Finally, Indigo invested in two other significant initiatives,
a new loyalty program and payment card Industry (“PCI”) compliance, both of which are expected to be
complete in the fiscal year ending March 31, 2012.
Loyalty Program
Indigo’s irewards customer loyalty program for which customers pay an annual fee, operates at its
superstores, small format stores, and online at www.chapters.indigo.ca to provide members with a
discount on all book purchases. Indigo believes that the program is important in generating significant
customer commitment and value. In addition, the transaction and demographic information provided by
the program provides a means to understand customer behaviour and respond with a variety of
sophisticated marketing and service strategies that generate measurable contribution to the business. The
irewards program had a combined total enrollment of approximately 940,000 members at the end of
March 2011.
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In January 2011, Indigo began to pilot a free, points-based loyalty program (plum rewards) as an
alternative to the fee-based irewards program in two markets. The goal of the free plum rewards program
is to grow Indigo’s known customer database in order to expand on the Company’s existing marketing
and service strategies to better know and thereby better serve our customers resulting in positive
contribution to the business. Furthermore, plum rewards supports Indigo’s evolution to a more diverse
merchandise mix by offering benefits that apply across most products available in-store. The pilot was
deemed successful, and in April 2011, the plum rewards program was rolled out to all stores. At the same
time, the irewards annual fee was increased and its discounts were expanded to include non-book
products in store.
Employees
As at April 3, 2011, Indigo employed a total of approximately 6,700 people (on a full-time and part-
time basis). The number of part-time customer experience representatives (CERs) employed by Indigo
fluctuates based upon seasonal demand. In 2011, Indigo implemented Phase III of the employee
scheduling system which allowed for labour cost optimization. The growth of the gift and lifestyle
categories was supported by a general merchant talent acquisition strategy that resulted in new merchant
hires at all levels including the appointment of Ray Camano as Chief General Merchant. Employee
development has been focused on providing store employees with the knowledge and skills to support our
key business initiatives in sales generation, eBooks, Kobo sales, our gift and lifestyle expansion, and our
toy expansion.
Since May 22, 2009, Indigo has had no collective agreements in place.
Trade Names and Trademarks
Protection of the Indigo and Chapters trademarks and associated design presentation is highly
important to Indigo and the Company has established procedures to protect the trademarks integral to its
business. It is Indigo’s policy to defend all of its intellectual property vigorously where appropriate. The
registrations of Indigo’s trademarks are renewable. Procedures are in place to ensure timely renewals.
Indigo is the owner of numerous trademarks and trade names that are registered in Canada. The
principal trademarks of the Company include: Indigo®; Indigo Books Music & More
®; Indigobaby
®;
Indigo! Kids®; Indigolife
®; Indigo Love of Reading Foundation
®; Indigospirit
®; Chapters
®; Coles
®;
Cultural Department Store®; Pistachio
®; Smithbooks
®; The Book Company and design; and World’s
Biggest Bookstore®.
In addition, Indigo owns certain domain names, including www.chapters.indigo.ca, which are used in
connection with its online business and presence.
Indigo Distribution Centres
Indigo maintains a 306,600 square foot retail distribution facility in Brampton, Ontario. The facility is
used for the distribution of retail products.
With the completion of the first phase of a supply chain project approved in June of 2009, Indigo
moved the fulfillment for online operations from the retail distribution centre to the new online fulfillment
centre which opened in Brampton, Ontario in September 2010. The new 162,800 square foot online
fulfillment centre supports an increased assortment of books and general merchandise product for online
customers. A new warehouse management system has been implemented in the online warehouse.
12
The second phase of the supply chain project is currently underway to upgrade the existing retail
facility to more efficiently support the retail stores. The project scope will replace the warehouse
management system and upgrade the material handling equipment. The improvements are expected to be
completed during fiscal 2012.
Properties
Indigo currently leases all its facilities. The average unexpired term under Indigo’s existing small
format store leases is approximately 2.8 years, and superstores have an average unexpired lease term of
approximately 3.7 years. Indigo has commenced a shorter-term leasing strategy for its small format
stores in order to maximize flexibility, hedge against the possibility of shopping centre deterioration, and
facilitate the implementation of the rationalization strategy related to its small format stores.
Indigo leases its main headquarters at 468 King Street West, Toronto, Ontario, M5V 1L8. Indigo’s
headquarters are approximately 65,000 square feet in size. Indigo also leases approximately 7,000 square
feet of space at 441 King Street West in Toronto, where it currently houses its real estate and online
groups.
Indigo also leases approximately 1,700 square feet of space at 176-180 Grand Street, New York, NY,
U.S.A. where it houses its design and product development office.
Indigo leases its retail and online distribution centre premises, which comprise approximately
306,600 square feet and 162,800 square feet of warehouse space, respectively, in Brampton, Ontario.
Sustainability
Indigo’s program has evolved to include a three-pronged approach to sustainability which focuses its
efforts to: 1) improve the sustainability of its book and non-book product through responsible purchasing
practices and policies; 2) reduce the Company’s operational impacts on the environment; and 3) increase
awareness of and build engagement among our employees and customers.
Many areas of the business have adopted new procedures that, in addition to improving
environmental performance, employee engagement, and enhancing brand reputation, may also improve
the bottom line by capitalizing on operational efficiencies.
Greening our Operations
The Company is continually working to identify, measure, and utilize opportunities throughout the
business in order to achieve Company-wide sustainability. These opportunities include:
The implementation of Indigo’s Environmental Paper Policy. Indigo established a leadership role
in the publishing industry encouraging better paper sourcing practices, increased use of recycled
paper fibre and pursuit of Forest Stewardship Council (FSC) certification for books. Indigo also
participates in the Boreal Business Forum comprised of leading corporations and investors with a
strong interest in conservation of the Boreal Forest;
Working to achieve reductions in packaging materials to improve efficiency and reduce costs;
Continuing to work to identify material-specific waste reduction opportunities. From 2007 to
2009 Indigo realized a 41% increase in the amount of waste diverted through store recycling
initiatives representing 7,710 tonnes of waste diverted from landfill;
Compiling energy consumption data across retail locations to better manage energy consumption,
helping to reduce both costs and the Company’s carbon footprint. Indigo has engaged the services
13
of a third party energy management group to allow for consumption insight and targeted
identification of energy reduction opportunities;
Indigo’s Book Product Donation Program, which allows unsold books designated for scrapping to
be donated to charity, has continued to grow. In fiscal year 2011, Indigo donated approximately
$200,000 worth of products to six literacy focused charitable partners. This program also
positively reinforces the brand with customers and employees and strengthens our ties to local
communities; and
Introduction of Indigo’s National Plastic Bag Reduction Program resulted in a 53% decrease in
plastic bag use in Indigo’s stores across the country and also reduced Indigo’s internal bag
program costs. Funds collected from the five cent bag fee were directed towards a variety of
internal and external sustainability initiatives.
Social Responsibility and Employee Engagement
As Indigo continues to diversify its product mix and to source from Asian markets, Indigo conducts
factory social accountability audits in accordance with international standard SA8000. This will continue
to be a focus for Indigo as it continues to grow the business.
Indigo recognizes that our employees want to be more involved in the IndigoGreen program. As such,
Indigo is launching the development of store Green Teams and an Indigo Green Guide during
Environment Week 2011. This is part of Indigo’s focus to increase employee perception of Indigo as an
environmentally and socially responsible company.
Indigo’s sustainability programs and policies have no material impact on earnings or capital
expenditures.
Indigo Love of Reading Foundation
In 2004, Indigo founded the Indigo Love of Reading Foundation to address the underfunding of
Canadian elementary schools and the resulting literacy crisis. The goal is to stimulate provincial
governments across the country to invest in public school libraries and promote early literacy through
engaging and relevant books. Until then, it will continue to put books in to the hands of children through
its annual Literacy Fund grant and grassroots Adopt a School program. To date it has committed $10.5
million to more than 415 schools in Canada with the support of Indigo and its customers, employees and
suppliers.
Regulatory Environment
The Investment Canada Act regulates the acquisition by a non-Canadian of control of a Canadian
business, including a business engaged in the publication, distribution or sale of books. Currently, foreign
investments to acquire control of an existing Canadian-controlled book publishing, distribution or
retailing business are generally not permitted. Acquisitions of a non-Canadian controlled business and
indirect acquisitions are subject to review by Heritage Canada, the government agency responsible for
determining whether the acquisition is likely to be of net benefit to Canada. As part of that determination,
Heritage Canada will typically seek from the foreign investor one or more commitments, such as a
commitment to the development of Canadian authors, a commitment to support the infrastructure of the
book distribution system in Canada, accessibility of the company’s Canadian marketing and distribution
infrastructure to interested and compatible Canadian-controlled publishers, and a commitment to
education and research through financial and professional assistance to Canadian institutions offering
programs in publishing studies. In addition, where the business is Canadian-controlled, other Canadians
must be given a full and fair opportunity to acquire the business. In practice, these provisions have not
14
generally been applied to businesses in which bookselling forms only an ancillary component of the
business, such as mass merchandisers. A foreign investment to establish a book publishing, distribution
or retailing business will generally not be permitted other than as a joint venture controlled by Canadians.
The Book Importation Regulations (the “Regulations”) to the Copyright Act (Canada) came into force
on September 1, 1999. The Copyright Act (Canada) and Regulations limit the “parallel importation” of
books legitimately produced in another country, which may be imported without the consent of the
Canadian copyright owner or exclusive distributor. The Regulations establish notice requirements and
distribution criteria that must be met by an exclusive distributor. Where the specified criteria are met,
orders may be placed for books only through the Canadian exclusive distributor. The Copyright Act
(Canada) provides that the parallel importation of books without consent of the Canadian copyright owner
or through the exclusive Canadian distributor constitutes copyright infringement.
In April 2010, the Government of Canada issued a one-time ruling to allow U.S. online retailer,
Amazon.com Inc., to operate a distribution centre in Canada. Amazon had previously operated in Canada
via a third-party operated distribution centre.
Heritage Canada has initiated a regulatory review of foreign investment in the Canadian book
industry. No recommendations in relation to this review have been put forth as of May 31, 2011.
Tax Loss Transaction
On May 30, 2011, Indigo purchased a company, the sole asset of which is certain tax losses, from a
public company controlled by Mr. Gerald W. Schwartz, who is also the controlling shareholder of Indigo.
Indigo acquired this company with $96.0 million of non-capital tax losses in exchange for net cash
consideration of $5.1 million and a note payable of $5.1 million. The note payable is non-interest bearing
and will be due on March 31, 2012. The transaction was recorded at the exchange amount and included
transaction costs shared between the two companies. As a result, the Company will record a future tax
asset of $24.3 million and the difference of $14.1 million between the net cash consideration and the
future tax asset will be accounted for under IFRS and recorded directly to retained earnings.
In April 2010, Indigo purchased a company, the sole asset of which is certain tax losses, from a public
company controlled by Mr. Gerald W. Schwartz, who is also the controlling shareholder of Indigo.
Indigo acquired this company with $69.6 million of non-capital tax losses in exchange for net cash
consideration of $7.7 million. The amount included transaction costs shared between the two companies.
This transaction was recorded at the exchange amount. As a result, the Company recorded a future tax
asset of $20.7 million and the difference of $13.0 million between the net cash consideration and the
future tax asset was recorded as a deferred credit, included in accounts payable and accrued liabilities. In
connection with this transaction, the Company obtained an advanced tax ruling from Canada Revenue
Agency.
Previously, in March 2009, Indigo purchased a company, the sole asset of which is certain tax losses,
from a public company controlled by Mr. Gerald W. Schwartz, who is also the controlling shareholder of
Indigo. Indigo acquired this company with $23.1 million of non-capital tax losses in exchange for net
cash consideration of $2.9 million. In connection with this transaction, the Company obtained an
advanced tax ruling from Canada Revenue Agency, and Grant Thornton LLP, an independent accounting
firm retained by the Company’s Audit Committee, provided an opinion that the value paid by the
Company for the tax losses was fair.
The transactions were unanimously approved by the Audit Committee, all the members of which are
independent directors.
15
Normal Course Issuer Bid
On November 2, 2009, Indigo commenced a normal course issuer bid (“NCIB”). Under the NCIB,
Indigo was entitled to purchase up to 1,227,229 of its common shares, representing approximately 5% of
its total outstanding common shares, with a daily maximum purchase of 2,571 common shares. All
common shares purchased under the NCIB were cancelled and returned to treasury.
Indigo entered into the NCIB because it believed that its common shares had been trading in a range
that did not fully reflect the value of the common shares. As a result, the Board of Directors of Indigo
believed that the purchase of common shares from time to time could be undertaken at prices that made
the acquisition of such common shares an appropriate use of Indigo’s available funds and an appropriate
mechanism for returning capital to its shareholders.
The NCIB expired on November 1, 2010. Under this NCIB, Indigo purchased 59,613 common shares
for an average purchase price of $13.93.
All purchases made by Indigo under the bid were made in accordance with the rules of the TSX at
market prices prevailing at the time of purchase.
A copy of the notice filed with the TSX with respect to Indigo’s NCIB can be obtained, free of
charge, upon request, from Indigo’s Secretary at 468 King Street, Suite 500, Toronto, Ontario, M5V 1L8.
Description of Kobo Inc.
Overview
In February 2009, Indigo launched Shortcovers (www.shortcovers.com), a new digital destination
offering online and mobile service that provides instant access to books, articles and blogs. On
December 14, 2009, Indigo transferred the net assets of Shortcovers to a new company, Kobo Inc. in
exchange for common shares of Kobo. The Shortcovers website was changed to www.kobobooks.com.
As at May 31, 2011, Indigo maintains 51.4% ownership of Kobo Inc.
Kobo is a global eReading service with more than 2.3 million eBooks, magazines and newspapers
available to its customers. Kobo offers an open, device-neutral platform that supports its belief that
consumers should have the freedom to read any book on any device.
Kobo sells third-party digital content, including eBooks, newspapers and magazine content through
its online store at www.kobo.com and its software applications for desktop and laptop computers,
smartphones, tablets, eReaders and other devices. Kobo also supplies digital content to retail partners
including Borders Group and REDgroup.
Kobo currently has distribution capabilities in Canada, the U.S., UK, European Union, Australia,
New Zealand, Hong Kong and other territories
Kobo’s platform includes proprietary applications which support a wide array of tablet, smartphone
and desktop devices on which customers can purchase and read their eBooks. Kobo also licenses its
technology and platform to leading partner booksellers across the globe to allow them to establish their
own branded eBook store and mobile applications “Powered by Kobo”.
Kobo also sells its own series of eReaders (devices dedicated to reading eContent). Kobo currently
sells its eReaders directly through its www.kobo.com website, as well as directly through book and non-
book retail partners in Canada, Australia, United Kingdom and the United States.
16
In the 52 weeks ended April 2, 2011, Kobo’s revenues (after eliminating inter-company sales) were
$60.9 million, representing 6.0% of Indigo’s total revenues. In the 31 weeks ended April 3, 2010, Kobo’s
revenues (after eliminating inter-company sales) were $0.8 million, representing 0.1% of Indigo’s total
revenues.
Market
The eBook and eReader markets have seen rapid growth in the last two years as a result of the rapid
adoption of mobile media consumption and eCommerce. In addition to eReaders, multifunctional tablet
devices such as the Apple iPad, Samsung Galaxy Tab and recently released BlackBerry PlayBook are
rapidly gaining recognition and popularity among consumers.
The rapid growth of eReaders and tablets has driven corresponding growth in the eBook market,
notably within the last three years. eBook sales are expected to grow significantly in the U.S. over the
next five years. Growth rates in developed economies outside of the United States are expected to lag by
approximately 1 to 2 years.
The periodical industry, including fully-illustrated (e.g. magazines) and text-oriented (e.g. newspapers
and scholarly journals) content, remains an attractive segment for digital content distributors. Kobo
entered these markets in October 2010, announcing the offering of a selection of some of the most
popular newspapers and magazines in the world to its customers on a paid subscription basis through
Kobo’s eContent store.
Many major participants within the eBook industry have focused predominantly on the U.S., the
largest market, and to a lesser extent the UK. While Kobo has developed a strong position within these
key markets, it has also established a prominent position in other important markets including Canada,
Australia and New Zealand.
The significance of multifunctional tablet computers to eReading should also be noted as tablets have
significantly expanded the addressable market beyond frequent readers and have furnished content
providers with a means to electronically distribute more graphic-rich content such as newspapers and
magazines.
eReaders differ from other devices used for eBook consumption such as multifunctional tablets and
smartphones in that they typically offer a superior eReading experience. eReaders often use screens
manufactured by the E Ink Corporation which allow for outdoor reading and, because they are not backlit,
reduce eye strain for readers. In addition, eReaders typically have longer battery lives and are lighter
weight relative to tablets. Thus, eReaders and tablets target distinct markets, with consumers who adopt
eReaders tending to be more frequent readers who prefer a dedicated device tailored to facilitating
uninterrupted digital reading, as opposed to tablet buyers, who prefer a device with broader media and
communications uses.
Competitive Conditions & Industry Trends
Major competitors to Kobo in the eBook distribution market include Amazon, Barnes & Noble,
Google and Sony. In addition, Apple with its iBookstore on its popular iPhone and iPad devices has also
become a recognized player in the eBook market.
Although the eReader market has seen many choices of eReaders over the past few years, including
competing brands such as the Amazon Kindle, Barnes & Noble Nook and Sony Reader, the market has
experienced a substantial reduction in the number of hardware-only eReader competitors and some of the
once-strong players are experiencing declining market shares. In addition, many early entrants including
large, well-funded companies have been forced to exit the eReader market. These trends highlight the
17
importance of establishing a robust content offering and eReading ecosystem in conjunction with the
eReader.
Along with its position as having one of the largest libraries of content for consumers, one of Kobo’s
other significant strengths relative to its major competitors has been its focus on innovating a better and
more social customer experience, including integration of social elements (e.g. gifting, book clubs,
recommendations, etc.), personalized reading capabilities and seamless and easy transfer of content
between devices.
An important differentiator among eReader devices is eBook file compatibility, which varies based
on the manufacturer’s approach to digital rights management (“DRM”). Some manufacturers have
chosen proprietary formats that can only be read on their devices and or with their applications. Kobo
supports formats (e.g. DRM ePub) that are device-agnostic and can be read on numerous platforms, a
philosophy that Kobo was one of the first in the industry to promote.
Fierce competition, combined with the introduction of lower-priced reading devices, and continually
decreasing component prices have resulted in a notable downward trend in eReader prices.
Kobo’s low price eReader strategy was based on a differentiated business model in which eReaders
are used as a channel through which to increase brand awareness and acquire customers to drive higher
margin eBook sales. Thus, Kobo reduces its reliance on eReaders relative to other eReader vendors in
favor of an eContent market with significantly higher margins and barriers to entry.
Shifts in the relationship between content providers and content distributors have reduced the
incidence of content distributors competing on price on a substantial number of titles. This change has
meant that content distributors such as Kobo and its competitors have had to identify other means of
competing to attract customers, including focusing on the quality and selection of content available and
differentiating the overall customer experience. These changes have significantly increased the barriers to
entry for new potential entrants into the eBook market space.
Through its established relationships with top publishers, both in the U.S. and globally, Kobo is able
to provide rich content through an attractive environment to its customers. The ability for new entrants
to replicate this achievement and establish relationships with the top publishers has become significantly
limited recently due to publishers’ desire to limit the intellectual property risks associated with increased
numbers of distributors, the difficulty for new entrants to develop reliable DRM that publishers can trust,
and the additional administrative expenses and growing complexity required to manage these global
content distributor contracts.
There are currently two methods by which Kobo works with book publishers to provide content to its
customers. The first is the traditional reseller model. Under this model, publishers sell books to a
bookseller, such as Kobo, at a specified recommended retail and set wholesale price, with the wholesale
price typically around 50% of the recommended retail price. The bookseller may then sell the book at a
discount to the recommended retail price.
In the U.S. publishers are moving to a newer agency model. Under the agency model, the publisher
remains the “vendor” who then uses eBook retailers, such as Kobo, as agents to facilitate the sale of
content to consumers. Under the agency model, the book publisher controls the book price and the
bookseller sells the book for the publisher and then receives a commission. Commissions are currently
generally 30% of the sale price.
Outside of the U.S., the agency model has been slower to take hold. In other key markets such as
Canada, Australia and New Zealand, agency contracts are beginning to materialize. Until publishers
adopt the agency model, the traditional reseller model is expected to remain in place in these other
markets.
18
Products and Content
eReaders
eReaders, low-power devices with paper-quality screens for reading eBooks and other digital content,
have recently experienced significant technological innovations in screen and form factors that have
enabled readers to enjoy an electronic reading experience truly comparable to that of reading a physical
book. In addition, the integration of wireless technology has made it easy and convenient for readers to
quickly and efficiently download content.
In March 2010, Kobo introduced the first generation Kobo eReader, a single-purpose, easy-to-use
device with a stylish design. The Kobo eReader was priced to provide readers with an affordable entry-
point to eReading. The Kobo eReader was sold through Indigo, Borders U.S., Wal-Mart Canada, Borders
Australia, Angus & Robertson and Whitcoulls.
In September 2010, Kobo introduced its second-generation eReader, the Kobo Wireless eReader.
Built upon the success of the Kobo eReader, the Kobo Wireless eReader added wireless connectivity,
upgraded hardware for faster performance, longer battery life and a sharper E Ink screen. The Kobo
Wireless eReader allows consumers to purchase eBooks directly from their eReader. The device began
shipping in October 2010. It is currently available at www.kobo.com as well as Indigo, Borders U.S., and
Wal-Mart in Canada and the U.S and at other retail partners.
Kobo’s first and second generation eReaders are preloaded with 100 free public domain titles,
including Pride and Prejudice and The Adventures of Huckleberry Finn, providing first-time users the
opportunity to test the Kobo eReading experience without having to purchase an eBook.
Content
Kobo has one of the largest eBook libraries in the world with over 340,000 paid titles from major and
independent publishers. Its catalog includes eBooks from over 2,200 publishers, including all of the top
50 publishers in the U.S.
Kobo has established close relationships with all of the world’s major publishing houses and has also
built relationships with a large number of smaller, independent publishers globally.
Kobo is currently focused on continuing to acquire content both for new markets, including Europe
and Asia, and in new content categories for existing markets. In October 2010, Kobo announced the
availability of subscription content from some of the most popular newspapers and magazines in North
America.
Additionally, Kobo also maintains a focus on establishing a platform for self-publishers to convert
and sell content through its store.
New Products
The launch of the all new Kobo eReader Touch Edition was announced on May 23, 2011.
The new Kobo eReader Touch Edition is currently available for pre-order in store at Chapters, Indigo
and Coles retail locations nationally and online at www.chapters.indigo.ca/kobo-touch and is expected to
be available in-store and online in June 2011.
Specialized Skills & Knowledge
Kobo has focused on building best-in-class technology capabilities. The well-educated,
knowledgeable and experienced in-house team has provided Kobo with the expertise and means to
19
develop a variety of key technologies that the Company believes provide Kobo with significant
competitive advantages and position it well for future growth.
The Kobo team has development expertise in a wide array of languages and platforms, including
languages: C#, Java, Objective C, C++, OS; and frameworks: Windows, .NET, Apple’s iOS, RIM
Blackberry OS, RIM QNX OS, Android OS, Embedded Linux.
Kobo actively recruits junior talent from leading universities in Canada, including the University of
Waterloo and University of Toronto. In addition, Kobo continues to actively recruit for its content
acquisition team globally.
eReader
Industrial Design
Kobo, in conjunction with 3rd
party design and innovation consulting firms, designed and owns the
design for its eReaders.
Hardware/Software Integration
Kobo developed and owns the eReader middleware and client software for its Kobo eReaders. These
proprietary technologies provide the interface to the customer’s content library and settings, as well as the
link between the front-end customer environment and the hardware and operating system.
While Kobo owns the eReader designs and middleware, it has outsourced the manufacturing of
components and assembly of the eReader through third-party relationships with key global suppliers.
Cycles
Given Kobo’s short operating history, there is no specific history from which to determine the
seasonality of the business. Kobo expects its business to be seasonal and follow quarterly sales and profit
(loss) fluctuation patterns similar to those of other retailers that generate a disproportionate amount of
their sales in the holiday sales season.
Economic Dependence
Indigo is not dependent on any Kobo contract.
Employees
As at the fiscal year ended April 2, 2011, Kobo had 195 full-time equivalent employees.
Intangible Assets
Protection of the Kobo trademarks, service marks, copyrights, trade secrets, proprietary technology,
and similar intellectual is highly important to Kobo. Kobo relies on trademark, copyright, and patent law,
trade secret protection, and confidentiality and/or license agreements to protect its proprietary rights.
Kobo has trademarks registered or pending in numerous jurisdictions throughout the world, including
Canada and the U.S. Kobo’s principal trademark is Kobo®.
In addition, Kobo owns certain domain names, including www.kobobooks.com, and www.kobo.com
which are used in connection with its online business and presence.
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Foreign Operations
Kobo’s international activities are significant to its revenues and profits. Kobo is subject to the
inherent risks of international operations, such as: economic and political conditions; local competition;
government regulations, restrictions and requirements; limited technology infrastructure; different
business practices; different consumer trends; Internet use levels; staffing difficulties; labour laws; and
cultural differences. It is costly to establish, develop and maintain international operations and websites
and promote Kobo’s brand internationally. Kobo’s international operations and partnerships may not be
profitable on a sustained basis.
Changes to Contracts
Indigo would not be materially impacted by the renegotiation or termination of any Kobo contract.
Reorganizations
In February 2009, Indigo launched Shortcovers (www.shortcovers.com), a new digital destination
offering online and mobile service that provides instant access to books, articles and blogs. On
December 14, 2009, Indigo transferred the net assets of Shortcovers to a new company, Kobo Inc.
(“Kobo”) in exchange for common shares of Kobo. The Shortcovers website was changed to
www.kobobooks.com.
On December 15, 2009, Kobo secured funding from Indigo and unrelated investors. As a result of the
transaction, Indigo retained 57.7% ownership of Kobo as of December 15, 2009.
On September 8, 2010, Kobo entered into an agreement with certain of its existing shareholders (the
“Investors”) to provide additional capital to Kobo upon the occurrence of specified funding events. The
first funding event under this agreement occurred on September 8, 2010, and Indigo purchased 2,040,816
shares for $3.6 million. The remaining Investors purchased 680,272 shares for $1.2 million. The second
funding event under this agreement occurred on November 19, 2010, and Indigo purchased 2,040,816
shares for $3.6 million. The remaining Investors purchased 680,272 shares for $1.2 million. The
overallotment option was exercised on December 13, 2010, and Indigo purchased 1,224,489 shares for
$2.1 million, increasing Indigo’s total ownership of Kobo from 57.7% to 61.4%. The remaining Investors
purchased 408,163 shares for $0.7 million.
On February 22, 2011, Kobo issued 6,209,881 shares to a syndicate of investors comprised of both
existing shareholders and new investors. Indigo purchased 2,589,580 common shares for $10.0 million
while the rest of the syndicate members purchased a total of 3,620,301 common shares for $14.0 million.
As a result of these transactions, Indigo’s ownership of Kobo decreased from 61.4% to 58.3%.
On April 19, 2011, Kobo issued 6,743,486 shares to a syndicate of investors comprised of both
existing shareholders and new investors. Indigo purchased 779,361 common shares for $3.0 million
while the rest of the syndicate members purchased a total of 5,964,125 common shares for $23.0 million.
As a result of these transactions, Indigo’s ownership of Kobo decreased from 58.3% to 51.4%. This
transaction will be accounted for under IFRS and as such, there is no gain or loss to Indigo on the
transaction.
RISK FACTORS
For a discussion of risk factors relating to Indigo and its business please see the section entitled
“Risks and Uncertainties” in the Company’s annual MD&A filed on SEDAR (accessible at
www.sedar.com) on May 31, 2011. In addition to the assumptions and risk factors identified in the
Company's MD&A, other factors that may affect future results are set out below.
21
Competition
The retail book selling business is highly competitive. Specialty bookstores, independent bookstores,
other book superstores, regional multi-store operators, supermarkets, drug stores, warehouse clubs, mail
order clubs, Internet booksellers, mass merchandisers and other retailers offering books are all sources of
competition for the Company.
The digital book industry is also highly competitive and is undergoing rapid growth. The number of
retailers selling eBooks has increased as has the number of retailers selling eReaders. The eReader
industry is changing rapidly with increased competition from new digital reading devices. As the digital
book industry continues to expand, increased eBook sales continue to impact the sales of physical books.
As eBooks are priced lower than physical books, if consumers reduce purchases of physical books in
favour of eBooks, it could reduce the Company’s future revenues.
Aggressive merchandising or discounting by competitors in either the retail or online sectors could
reduce the Company’s market share and its operating margins.
The Company faces various risks as an Internet retailer
Business risks related to its online business include risks associated with the need to keep pace with
rapid technological change, Internet security risks, risks of system failure or inadequacy, government
regulation and legal uncertainties with respect to the Internet. If any of these risks materializes, it could
have an adverse effect on the Company’s business.
The Company’s business is dependent on consumer spending patterns
Sales of books, music, gifts, toys and movies have historically been dependent upon discretionary
consumer spending, which may be affected by general economic conditions, consumer confidence and
other factors beyond the Company’s control. In addition, sales are dependent in part on the strength of
new product releases which are controlled by vendors. A decline in consumer spending on these
products, or in the strength of new product releases, could have a material adverse effect on the
Company’s financial condition and results of operations.
External Events
Weather conditions, as well as events such as political or social unrest, natural disasters, disease
outbreaks, or acts of terrorism, could have a material adverse effect on the Company’s financial
performance. Moreover, if such events were to occur at peak times in the Company’s annual business
cycle, the impact of these events on operating performance could be significantly greater than it would
otherwise have been.
Inventory Risk
The Company is exposed to significant inventory risks on any product that is purchased “non-
returnable” as a result of seasonality, new product launches, rapid changes in product cycles and changes
in consumer tastes with respect to our products. In order to be successful, the Company must accurately
predict these trends and avoid overstocking or under-stocking products. Demand for products, however,
can change significantly between the time inventory is ordered and the date of sale. In addition, when the
Company begins selling a new product, it may be difficult to establish vendor relationships, determine
appropriate product selection, and accurately forecast product demand. For the Company’s online
business, a failure to optimize inventory within the fulfillment network will increase net shipping costs
22
due to the need to make split shipments from one or more locations, complementary upgrades, and
additional long-zone shipments necessary to ensure timely delivery.
The acquisition of certain types of non-book inventory, or non-book inventory from certain sources,
may require significant lead-time and prepayment. The Company carries a broad selection and significant
inventory levels of certain products, and it may be unable to sell products in sufficient quantities or during
the relevant selling seasons.
Any one of the inventory risk factors set forth above may adversely affect our operating results.
Regulatory Environment
The distribution and sale of books is a regulated industry in which foreign ownership is generally not
permitted under the Investment Canada Act. As well, the sourcing and importation of books is governed
by the Book Importation Regulations to the Copyright Act (Canada). In April 2010, the government of
Canada issued a one-time ruling to allow U.S. online retailer, Amazon.com Inc., to operate a distribution
centre in Canada. There is no assurance that the existing regulatory framework will not change in the
future or that it will be effective in preventing foreign-owned retailers from competing in Canada.
Credit, Foreign Exchange, and Interest Rate Risks
The maximum exposure to credit risk at the reporting date is equal to the carrying value of accounts
receivable. The Company has two streams of accounts receivable. Indigo’s customer base primarily
consists of retail customers who pay by cash or credit card, while a significant percentage of Kobo’s
customer base are corporate clients who pay on account. Kobo sells eBook readers to corporate clients
and performs back-end operations for corporate eBook stores. Cash and credit card payments have
minimal credit risk and the limited number of corporate receivables are closely monitored.
The Company’s foreign exchange risk is largely limited to currency fluctuations between the
Canadian and U.S. Dollars. However, the strategic partnerships entered into by Kobo have resulted in
sales to customers worldwide in a number of different currencies. Therefore, foreign exchange risk is
expected to increase as Kobo expands its operations. Kobo is in the start-up phase of operations and its
current impact on foreign exchange risk is not significant. Given that Indigo has determined that its
foreign currency risk is manageable, the Company does not use foreign currency derivative contracts to
hedge its foreign exchange risk.
The Company’s interest rate risk is limited to the fluctuation of floating rates on its cash and cash
equivalents. Counter-party credit risk is considered to be negligible as the Company only deals with
highly rated financial institutions.
Leases
The average unexpired lease term of Indigo’s superstores and small format stores is approximately
3.7 years and 2.8 years, respectively. The Company generally attempts to renew these leases as they
come due on favourable terms and conditions, but is susceptible to volatility in the market for supercentre
and shopping mall space. Unforeseen increases in occupancy costs, or costs incurred as a result of
unanticipated store closing and relocation could unfavourably impact the Company’s performance.
23
Dependence on Key Personnel
Indigo’s continued success will depend to a significant extent upon its management group. The loss
of the services of key personnel, particularly Ms. Heather Reisman, the Chair and Chief Executive Officer
of Indigo, could have a material adverse effect on Indigo.
Legal Proceedings
In the normal course of business, Indigo becomes involved in various claims and litigation. While the
final outcome of such claims and litigation pending as at April 2, 2011 cannot be predicted with certainty,
management believes that any such amount would not have a material impact on the Company’s financial
position.
Compliance with Privacy Laws
In Canada, the Personal Information Protection and Electronic Documents Act (“PIPEDA”) was
passed into law by the federal government effective as of January 1, 2001. Currently, this law applies to
all organizations that collect, use or disclose personal information in the course of commercial activities,
except to the extent that provincial privacy legislation has been enacted and declared substantially similar
to the federal legislation. To date, certain provinces have enacted “substantially similar” private sector
privacy legislation. The federal privacy legislation also regulates the inter-provincial collection, use and
disclosure of personal information. Applicable Canadian privacy laws create certain obligations on
organizations that handle personal information, including obligations relating to obtaining appropriate
consent, limitations on use and disclosure of personal information and ensuring appropriate security
safeguards are in place. In the course of its business, the Company maintains records containing sensitive
information identifying or relating to individual customers and employees. Although the Company has
implemented systems to comply with applicable privacy laws in connection with the collection, use and
disclosure of such personal information, if a significant failure of such systems was to occur, the
Company’s business and reputation could be adversely affected.
Other
The Company’s performance may also be affected by other specific risks that may be highlighted
from time to time in other public filings of the Company available on the Canadian securities regulatory
authorities’ website at www.sedar.com. The Company cautions that the preceding discussion of factors
that may affect future results is not exhaustive. When relying upon forward-looking statements to make
decisions with respect to the Company, investors and others should carefully consider these factors, as
well as other uncertainties, assumptions, potential events and industry and Company specific factors that
may adversely affect future results. The Company assumes no obligation to update or revise them to
reflect new events or circumstances, except as required by law.
DIVIDENDS
In fiscal 2011, Indigo paid a total of $0.44 per share in dividends.
In fiscal 2010, Indigo implemented a quarterly cash dividend of $0.10 per common share, or $0.40
per share annually on its common shares. In fiscal 2010, Indigo paid a total of $0.40 per share in
dividends. On April 19, 2010, Indigo announced a 10% increase in its quarterly cash dividend to $0.11
per common share, or $0.44 per share annually on its common shares. Indigo did not pay dividends in
fiscal years 2009 or 2008. Indigo has no contractual restrictions that would limit its ability to pay
dividends in the future. Future declaration of quarterly dividends and the establishment of future record
and payment dates are subject to the final determination of the Company’s Board of Directors.
24
DESCRIPTION OF CAPITAL STRUCTURE
The authorized share capital of Indigo consists of an unlimited number of common shares, of which
25,158,540 common shares are issued and outstanding as at May 31, 2011.
Each Common Share entitles the holder thereof to one vote at meetings of shareholders of Indigo and
to participate equally and rateably in any dividends declared on the common shares by the Board of
Directors of Indigo, and in any remaining property or assets of Indigo that may be distributed in the event
of voluntary or involuntary liquidation, dissolution or winding-up of Indigo.
CONSTRAINTS
For a discussion of constraints imposed on the ownership of Indigo’s securities please refer to the
section “Description of the Retail Business – Regulatory Environment”.
MARKET FOR SECURITIES
Common shares in the capital of Indigo are listed and posted for trading on the TSX under the symbol
IDG. There are currently no other classes of shares in the capital of Indigo issued or outstanding.
The following table sets out the price ranges and volumes traded for Indigo’s common shares on a
monthly basis for each month in fiscal 2011:
OPEN ($) HIGH($) LOW ($) CLOSE ($) VOLUME
April 2010 17.86 18.11 16.07 17.30 1,097,909
May 2010 17.44 17.46 14.53 15.01 497,192
June 2010 14.25 15.60 14.00 14.30 199,276
July 2010 14.12 15.44 13.50 14.86 127,701
August 2010 15.05 15.49 14.00 14.15 178,121
September 2010 14.01 14.90 13.25 14.80 690,371
October 2010 14.66 15.74 14.51 15.31 275,344
November 2010 15.31 15.86 14.86 15.02 380,396
December 2010 15.15 15.50 14.15 14.65 725,185
January 2011 14.51 15.15 14.38 15.09 297,266
February 2011 15.14 15.25 13.86 14.15 326,491
March 2011 14.27 14.43 12.92 13.10 342,546
DIRECTORS AND OFFICERS
The following table and notes thereto state the names and provinces or states of residence of all the
directors and officers of Indigo as at May 31, 2010, their respective principal occupations, business or
employment within the five preceding years, their beneficial ownership of common shares and, with
respect to the directors, the year in which they became directors of Indigo. Each director will hold office
until the next annual meeting of shareholders of Indigo, or until such director’s successor is duly elected,
unless the office is earlier vacated in accordance with the by-laws of Indigo.
25
Name, Province or State
and Country
Position and/or office
with Indigo
Present principal occupation,
if different from office held
Period during which
served as a director
Common Shares beneficially
owned or controlled
as at May 31, 2011(5)
HEATHER REISMAN ..................... Chair & Chief Executive Officer n/a Since February 4, 2001 98,391 Common Shares
Ontario, Canada And Director
BONNIE BROOKS (6) ..................... Director President and CEO, the Bay, Since May 23, 2009 nil Common Shares Ontario, Canada Hudson’s Bay Company
(diversified general merchandise
retailer)
FRANK CLEGG(1) (3) ........................ Director Chairman, Navantis Inc. Since February 1, 2005 nil Common Shares
Ontario, Canada (custom computer software
application developer)
JONATHAN DEITCHER(2) .............. Director Investment Advisor, Since August 7, 2001 nil Common Shares
Quebec, Canada RBC Investments
(wealth management company)
MITCHELL GOLDHAR .................. Director President & Chief Executive Since February 2, 2006 nil Common Shares Ontario, Canada Officer, SmartCentres
(commercial real estate
development company)
JAMES HALL(1)(2)(3) ......................... Ontario, Canada
Director President & CEO, James Hall Advisors Inc.
(Advisory Firm)
Since August 7, 2001 nil Common Shares
MICHAEL KIRBY(1)(2)(3) .................. Director Corporate Director Since February 4, 2001 nil Common Shares
Ontario, Canada Chair of the Mental Health Commission of Canada
(non-profit organization created
to focus national attention on
mental health issues)
TEDFORD MARLOW(7) .................. President & Director n/a Since November 9, 2010 nil Common Shares
Connecticut, USA
BRUCE MAU................................... Director Chairman and Creative Director, Since November 1, 2007 nil Common Shares
Illinois, USA Bruce Mau Design
(design and innovation studio)
ANNE MARIE O’DONOVAN(3) ..... Director Executive Vice President and Chief Since December 27, 2009 nil Common Shares
Ontario, Canada Administration Officer, Scotia Capital
(global corporate and investment
banking company)
JOEL SILVER(8) ...............................
Ontario, Canada
Director President
Trilogy Growth
Since April 19, 2011 3,100 Common Shares
(investment firm specializing in
media, technology and retail
opportunities)
GERALD SCHWARTZ ...................
Ontario, Canada
Director Chairman, President and Chief
Executive Officer
Since February 4, 2001 15,218,474 Common Shares(4)
Onex Corporation
(diversified company)
KAY BREKKEN .............................. Chief Financial Officer n/a n/a nil Common Shares
Ontario, Canada
RAY CAMANO(9) ............................ Executive Vice President and n/a n/a nil Common Shares Ontario, Canada Chief General Merchant
LAURA DUNNE(10) ......................... SVP Human Resources and n/a n/a nil Common Shares
Ontario, Canada Organizational Development n/a n/a
KATHLEEN FLYNN ....................... General Counsel and n/a n/a nil Common Shares
Ontario, Canada Corporate Secretary
JOYCE GRAY ................................. Executive Vice President n/a n/a nil Common Shares
Ontario, Canada Retail & Customer Experience
26
Name, Province or State
and Country
Position and/or office
with Indigo
Present principal occupation,
if different from office held
Period during which
served as a director
Common Shares beneficially
owned or controlled
as at May 31, 2011(5)
DEIRDRE HORGAN Chief Marketing Officer n/a n/a nil Common Shares Ontario, Canada
ROSS MARANCOS ......................... Executive Vice President n/a n/a nil Common Shares
Ontario, Canada Supply Chain
JIM McGILL .................................... Chief Operating Officer n/a n/a 5,000 Common Shares
Ontario, Canada
SUMIT OBERAI .............................. Chief Information Officer n/a n/a 800 Common Shares Ontario, Canada
ANDREW SLOSS ............................ Executive Vice President, Online n/a n/a nil Common Shares Ontario, Canada
_________________________
(1) Member of Human Resources and Compensation Committee.
(2) Member of Corporate Governance Committee.
(3) Member of Audit Committee.
(4) Mr. Schwartz is the principal of Trilogy Retail Enterprises Inc., the general partner of Trilogy Retail Enterprises L.P. (“Trilogy”). Trilogy
owns directly or indirectly 13,028,167 common shares, representing approximately 51.78% of the outstanding Shares. Ms. Reisman, who owns directly or indirectly, 98,391 common shares, is Mr. Schwartz’ spouse.
(5) As at May 31, 2011, our directors and executive officers as a group, beneficially owned, directly or indirectly, or exercised direction or
control over 15,325,765 common shares, representing approximately 60.91% of the outstanding Common Shares.
(6) Ms. Brooks has been the President & CEO, the Bay, Hudson’s Bay Company since September 2008. From 2003 to 2008 Ms. Brooks was the
President of Lane Crawford Joyce Group, a Hong Kong based department store chain.
(7) Mr. Marlow has been President of Indigo Books & Music Inc. since April 3, 2011. From June 2001 to June 2010, Mr. Marlow was the Global Brand President of Urban Outfitters, a specialty retailer based in Philadelphia, Pennsylvania, USA.
(8) Mr. Silver has been with Trilogy Growth since April 2011. From December 2003 through April 2011, Mr. Silver held the following
positions at Indigo Books & Music Inc.: October 2009 through April 2011 – President; April 2007 through October 2009 - Chief Merchant; June 2005 through April 2007 - Executive Vice President, Print & Entertainment; December 2003 through June 2005 – Vice President, Print
Procurement.
(9) Mr. Camano has been Executive Vice President and Chief General Merchant of Indigo since January 10, 2011. From 2007 through 2010, Mr. Camano was the Executive Vice President of Design, Merchandising, Production, and Product Management with A|X Armani Exchange,
a division Giorgio Armani SPA, and was the Senior Vice President, Merchandising and Production with A|X Armani Exchange from 2002
through 2007.
(10) Ms. Dunne has been Senior Vice President, Human Resources and Organizational Development of Indigo Books & Music Inc. since October
4, 2010. From August 2005 to January 2009 Ms. Dunne was the Senior Vice President, Human Resources with Canadian Tire Corporation
Ltd., a Canadian retail and financial services firm. From 2009 to 2010 Ms. Dunne was an independent consultant.
Heather Reisman – Chair & Chief Executive Officer. Ms. Reisman has been Chief Executive Officer
of Indigo since February 4, 2001. She has also been Chair, Director and Chief Executive Officer of
Indigo and its predecessors. Prior to the merger of Indigo and Chapters, Ms. Reisman was Chief
Executive of Indigo Books & Music, Inc. Ms. Reisman is also the chair of Kobo.
Bonnie Brooks – Director. Bonnie Brooks is the President and CEO of The Bay, Hudson’s Bay
Company. Ms. Brooks has spent more than 25 years building prestige retail formats around the world,
including Holt Renfrew, Lane Crawford, Harvey Nichols, and leading designer brand stand-alone stores
in Asia. Most recently, Ms. Brooks was the President of the Lane Crawford Joyce Group based in Hong
Kong. She has also served as Editor-in-Chief of FLARE, Canada’s largest fashion and lifestyle magazine.
In August 2010, Ms. Brooks was appointed to the position of Trustee of the Royal Ontario Museum by
the Premier of Ontario. Ms. Brooks holds an MBA from the University of Western Ontario.
Frank Clegg – Director. Frank Clegg was President of Microsoft Canada Co. from September, 2000 to
January, 2005. Prior to that he was Vice President, Central Region of Microsoft Corporation. Mr. Clegg
is Chairman of KINSA, a kids internet safety non-profit organization. Mr. Clegg is also a member of the
board of directors of Kobo. Mr. Clegg is a member of the Indigo Audit and HR & Compensation
Committees and is the Technology Advisor to the Indigo Board of Directors.
27
Jonathan Deitcher – Director. Jonathan Deitcher is an investment advisor with RBC Dominion
Securities where he has been employed since 1977. He served as a Director at RBC from November 2000
to September 2003. Mr. Deitcher has been a Vice-President at RBC since August 2004. Mr. Deitcher is
a member of Indigo’s Corporate Governance Committee.
Mitchell Goldhar – Director. Mitchell Goldhar is the owner of SmartCentres, a private real estate
development company. SmartCentres has developed over 210 shopping centres across Canada in the last
15 years. Mr. Goldhar holds a B.A. in Political Science from York University and is in his 10th year as
an adjunct professor with the Joseph L. Rotman School of Management, University of Toronto. He is
also a member of the Board of Directors of the Calloway Real Estate Investment Trust and the Sick Kids
Foundation.
James Hall – Director. Mr. Hall, a chartered accountant, is President & CEO of James Hall Advisors
Inc., a corporate advisory firm. Mr. Hall is a director of International Datacasting Corporation and
Immunovaccine Inc. and was, until March 2009, Chairman and Chief Executive Officer of Journal
Register Company. Mr. Hall is Chair of Indigo’s Human Resources and Compensation Committee and is
a member of the Audit Committee and the Corporate Governance Committee. Mr. Hall holds an HBA
from the Ivey School of Business at the University of Western Ontario.
Michael Kirby – Director. From January 1984 to October 2006 Michael Kirby was a member of the
Senate of Canada. From 1994 to 1999, he was the Chairman of the Standing Senate Committee on
Banking, Trade and Commerce. From 1999 to 2006 he was the Chairman of the Standing Senate
Committee on Social Affairs, Science and Technology. Mr. Kirby is the Chair of the Audit Committee
and a member of the Executive Committee of the Bank of Nova Scotia and the Chair of the Audit
Committee of the Just Energy Income Fund. Mr. Kirby is Indigo’s Lead Director, the chair of the Audit
and Corporate Governance Committees and is a member of the Human Resources and Compensation
Committee.
Tedford Marlow – President and Director. Ted Marlow was appointed President of Indigo on April 1,
2011. From July 2001 to June 2010 Mr. Marlow served as the Global President of the Urban Outfitters
Brand. Over the course of nine years Ted shepherded a dramatic period of growth for Urban Outfitters
through retail store expansion in North America and Europe, leveraging online contribution in North
America and Europe and catalogue/database marketing in North America. Prior to joining Urban
Outfitters, Ted held a variety of senior management and merchant roles with some of North America’s
most established and successful retailers, including Neiman Marcus, Saks Fifth Avenue, Marshall Fields
and Limited, Inc.
Bruce Mau – Director. Bruce Mau is the Co-Founder and Creative Director of Bruce Mau Live, a new
initiative committed to developing purposeful projects in education, health, leadership, and security.
Bruce is an author and designer of several award-winning books, including LifeStyle (Phaidon),
S,M,L,XL (The Monacelli Press) in collaboration with Rem Koolhaas, and the iconic and celebrated
ZONE BOOKS series and Mau’s Incomplete Manifesto for Growth. Bruce founded the Institute without
Boundaries – an innovative, studio-based postgraduate program in collaboration with George Brown
College, Toronto. He is also the Founder and Chairman Emeritus of Bruce Mau Design and has 25 years
of studio experience in design innovation and collaboration with some of the world’s leading artists,
institutions and businesses, where he used design and optimism to originate, innovate, and renovate
businesses, brands, products, and experiences.
Anne Marie O’Donovan – Director. Anne Marie O'Donovan, FCA - Director. Anne Marie O'Donovan
is the Executive Vice President and Chief Administration Officer for Scotia Capital. She is responsible
for finance, technology, operations, strategy and governance for the wholesale and capital markets
28
businesses of Scotiabank. Ms O'Donovan was previously a partner with Ernst & Young. She holds an
HBA from the Ivey School of Business at the University of Western Ontario and is a Fellow of the
Institute of Chartered Accountants of Ontario. Ms O'Donovan is a member of the Indigo Audit
Committee.
Joel Silver – Director. Joel Silver leads Trilogy Growth, a partnership with Trilogy Retail Enterprises
LP, the majority shareholder of Indigo. Trilogy Growth makes direct investments in innovative retail,
online and media companies. Prior to this, Mr. Silver served as President of Indigo, driving the growth
and profitability of the core print business, guiding the launch and development of the kids’ toy business,
significantly expanding the lifestyle business, as well as spearheading IndigoGreen, a key initiative, for
which the Company has won several awards. Mr. Silver began his career at Procter & Gamble and co-
founded Salesdriver, a web-based company sold to Carlson in 2002. Mr. Silver holds an MBA from the
Harvard Business School.
Gerald Schwartz – Director. Mr. Schwartz founded Onex Corporation, one of North America’s oldest
and largest private equity firms, in 1984. Mr. Schwartz is presently the chairman and chief executive
officer of Onex and a director of Celestica Inc. Mr. Schwartz was inducted into the Canadian Business
Hall of Fame in 2004 and was appointed an Officer of the Order of Canada in 2006.
Kay Brekken – Chief Financial Officer. Ms. Brekken joined Indigo in November 2003 as Vice
President Finance and was promoted to the CFO role in April 2011. As CFO, Kay is responsible for
Indigo’s Finance, Accounting, Internal Audit, Loss Prevention, and IndigoGreen teams. Prior to joining
Indigo, she served as CFO and VP of Regional Operations for Medical Consultants Network, a leading
national provider of medical judgment services based in Seattle, Washington. Before that, Kay was a
Senior Consultant with Deloitte & Touche and a Vice President in Key Bank’s Corporate Banking
Division. Kay holds a Masters in Business Administration from the University of Washington and a
Bachelors of Business Administration from the University of Minnesota.
Kathleen Flynn – General Counsel and Corporate Secretary. Ms. Flynn joined Indigo in February
2000 as Corporate Counsel of Chapters Online, then Corporate Counsel of Chapters Inc. and now holds
the position of General Counsel and Corporate Secretary of Indigo with responsibility for legal and
corporate governance matters. Previously, Ms. Flynn was corporate counsel with Sears Canada Inc. Ms.
Flynn holds an LLB from Queen’s Law School and a Masters Degree in law from Osgoode Hall.
Deirdre Horgan – Chief Marketing Officer. Ms. Horgan joined Indigo in 1998 and is responsible for
overall marketing and brand management in both the store and online businesses. Prior to joining Indigo,
she was a management consultant with The Boston Consulting Group.
Jim McGill – Chief Operating Officer. Mr. McGill was hired as Chief Financial Officer in March of
2003, and was subsequently appointed as Chief Operating Officer and Chief Financial Officer in October
of 2009. Mr. McGill stepped down from the position of Chief Financial Officer on April 2, 2011; he
retains his Chief Operating Officer responsibilities for all Human Resources, Supply Chain and
Information Technology related issues. Mr. McGill has resigned from Indigo with an effective date of
June 30, 2011.
Sumit Oberai – Chief Information Officer. Sumit Oberai joined Indigo in April 2006 and is responsible
for all information technology functions. Prior to Indigo, Sumit was SVP, Engineering at Eloqua, a
venture backed marketing automation firm and a consultant for McKinsey & Company where he focused
on strategy & operations for technology and telecom clients. Before that, he held various technology
leadership roles at Critical Path, DocSpace, and Nortel Networks. Sumit holds a Masters of Business
Administration from INSEAD, a Masters of Computer Engineering from University of Toronto, and a
29
Bachelors of Mathematics & Engineering from Queen's University where he graduated as the Gold
Medalist.
Joyce Gray – Executive Vice President, Retail and Customer Experience. Joyce Gray joined Indigo in
July 2007 and is accountable for retail operations, customer service and store performance. Prior to
joining Indigo, Ms. Gray managed The Gap’s North East Territory. Prior to The Gap, Ms. Gray was EVP
of Marketing at Wild Escape Theme Park in Omaha and Vice President, Business & Strategic Planning
with Disney Entertainment.
Ross Marancos – Executive Vice President, Supply Chain. Ross Marancos joined Indigo in July 2007
and is accountable for inventory management, transportation, warehousing and master data. Prior to
joining the Indigo organization, Mr. Marancos served as Director of Supply Chain for Whirlpool Canada
and Senior Director Supply Chain at KRAFT Canada Inc.
Andrew Sloss – Executive Vice President, Online. Andrew Sloss joined Indigo in September 2009 and
is responsible for the growth and profitability of the online business. Prior to joining Indigo, Andrew was
the general manager of eBay and Kijiji Canada, Canada's leading online marketplace and classifieds
platforms. Andrew holds a Masters of Business Administration from the Kellogg Graduate School of
Management, and a Bachelor of Applied Science in Systems Design Engineering from the University of
Waterloo.
Laura Dunne – Senior Vice President, Human Resources and Organizational Development. Laura
Dunne joined Indigo in October 2010 and is responsible for the Company’s human resources and
organizational development. Laura joins Indigo after almost a decade at Canadian Tire where she most
recently served as SVP Human Resources and sat on the retailer’s Executive Committee. Laura brings a
broad range of experience in all aspects of Human Resources, with particular specialty in compensation,
to Indigo. Laura holds a Bachelor of Arts from the University of Toronto.
Ray Camano – Executive Vice President and Chief General Merchant. Ray Camano joined Indigo in
January 2011 and is accountable for the sales and profitability of Gift, Paper, and Lifestyle product. Prior
to joining Indigo, Ray was Executive Vice President of Design, Merchandising, Production, and Product
Management at A|X Armani Exchange, a division Giorgio Armani SPA. Ray holds a Bachelor of Arts
degree from Hamilton College.
AUDIT COMMITTEE
The text of the Audit Committee Charter is attached hereto in Appendix A.
Composition of the Audit Committee and Relevant Education and Experience of the Members
The Audit Committee is composed of: Frank Clegg, James Hall, Michael Kirby, and Anne Marie
O’Donovan all of whom are independent and financially literate within the meaning set out in National
Instrument 52-110.
Mr. Clegg was the President of Microsoft Canada Co. from September, 2000 to January, 2005. Mr.
Clegg brings his extensive information technology background to the Audit Committee at a point in time
when the oversight of IT governance has become an important responsibility for boards and audit
committees.
Mr. Hall is a Chartered Accountant and a director and chair of the audit committees of International
Datacasting Corporation and Immunovaccine Inc. and was, until March 2009, Chairman and Chief
30
Executive Officer of Journal Register Company. He previously served as chair of the audit committees of
Terravest Income Fund and General Donlee Income Fund, and was a member of the audit committees of
Global Credit Pref Corp and Journal Register Company. Mr. Hall is Chair of Indigo’s Human Resources
and Compensation Committee and is a member of the Audit Committee and the Corporate Governance
Committee.
Mr. Kirby is Chairman of the Mental Health Commission of Canada and a corporate director. Mr.
Kirby was a member of the Senate of Canada from 1984 until 2006. He holds a B.Sc. and M.A. in
mathematics from Dalhousie University and a PhD in Applied Mathematics from Northwestern
University.
Mr. Kirby sits on the boards of Extendicare REIT, MDC Partners Inc., Just Energy Corporation, The
Bank of Nova Scotia and Immunovaccine Inc. Mr. Kirby is Chair of the Audit Committee and the Risk
Committee of Just Energy Income Fund, Chair of the Board of Immunovaccine Inc, Chair of the Audit
Committee and member of the Executive and Risk Committee of the Bank of Nova Scotia, Chair of the
Audit Committee and the Corporate Governance Committee of Indigo. He is Chair of the Extendicare
Human Resources and Corporate Governance Committees, the Chair of the Human Resources Committee
of MDC Partners Inc., and a member of MDC Partners Inc. Audit and Corporate Governance
Committees. Mr. Kirby was the Vice Chair of the Accounting Standards Oversight Council. Previously,
Mr. Kirby was Chair of the Standing Senate Committee on Banking, Trade and Commerce, the Senate
Committee which handles all business legislative and regulatory issues, and was Chair of the Standing
Senate Committee on Social Affairs, Science and Technology. In addition, at different times during the
period from 2002 to 2007, Mr. Kirby served as a director of the following publicly-traded companies:
Azure Dynamics Corp., Brainhunter Inc., Maxxcom Inc., CPI Plastics Group Ltd., and Extendicare Inc.
Mr. Kirby is Indigo’s Lead Director, the chair of the Audit and Corporate Governance Committees and is
a member of the Human Resources and Compensation Committee.
Ms. O'Donovan is a Chartered Accountant and has held numerous financial management roles including
her current role as EVP Chief Administration Officer forScotia Capital. She also brings experience in
governance, internal control and risk management from her previous positions as the Chief Auditor for
Scotiabank and a partner at Ernst & Young.
Pre-Approval Policies and Procedures
All Audit Committee decisions regarding the engagement of Indigo’s auditor for the provision of
non-audit services are approved by the Board of Directors.
31
External Auditor Service Fees
The following table summarizes the Audit, Audit Related, Tax Related and Other Fees (excluding
expenses and taxes) of Indigo’s Auditor, Ernst & Young LLP, for the two most recently completed fiscal
years.
2011 2010
Audit Fees ($) 337,000 310,500
Audit-Related Fees ($) 110,372 123,550
Tax Fees ($) 66,500 151,950
All Other Fees ($) 3,200 nil
TOTAL ($) 517,072 586,000
The foregoing fees and expenses relate to services rendered from April through March of the fiscal
year, notwithstanding when the fees and expenses were billed.
In 2011, Audit-Related Fees incurred related to translation services and accounting consultations on
Kobo, segment reporting and International Financial Reporting Standards. In 2010, Audit Related Fees
incurred related to translation services. In both 2010 and 2011, tax fees related to tax compliance and tax
planning/consulting services.
TRANSFER AGENT AND REGISTRAR
Indigo’s transfer agent and registrar is CIBC Mellon Trust Company and Indigo’s Common Share
register is located at their offices at 320 Bay Street, P.O. Box 1, Toronto, ON, M5H 4A6.
EXPERTS
As at the date hereof, the partners and associates of our auditor, Ernst & Young LLP do not
beneficially own, directly and indirectly, any Common Shares of Indigo. Ernst & Young LLP is
independent of the Company in accordance with the Rules of Professional Conduct of the Institute of
Chartered Accountants of Ontario.
ADDITIONAL INFORMATION
Additional information, including directors’ and officers’ remuneration and indebtedness, principal
holders of Indigo’s securities and options to purchase securities and interests of insiders in material
transactions is contained in Indigo’s most recent Management Information Circular as filed with
Canadian securities regulatory authorities on SEDAR on June 2, 2011. Further information can also be
found on SEDAR at www.sedar.com. Additional financial information is provided in Indigo’s
comparative financial statements and MD&A for the fiscal year ended April 2, 2011, which are included
on pages 9 through 51 of Indigo’s 2011 Annual Report.
Copies of the following documents may be obtained, upon request, from Indigo’s Secretary at 468
King Street, Suite 500, Toronto, Ontario, M5V 1L8:
a) one copy of this Annual Information Form, together with one copy of any document, or the
pertinent pages of any document, incorporated by reference in this Annual Information Form;
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b) one copy of Indigo’s consolidated financial statements for its most recently completed financial
year together with the accompanying report of the auditor and one copy of any of Indigo’s interim
financial statements subsequent to the financial statements for its most recently completed
financial year; and
c) one copy of the Indigo’s most recent Management Information Circular as filed with Canadian
securities regulatory authorities on SEDAR on June 2, 2011.
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SELECTED CONSOLIDATED FINANCIAL INFORMATION
52-week period
ended April 2, 2011
53-week period
ended April 3, 2010
52-week period
ended March 28, 2009
(in thousands of Canadian dollars, except
share and per share data)
Statement of Operations
Data: Revenue
Superstores .............................. 667,582 670,542 634,727
Small format stores.................. 148,702 157,418 166,225 Internet .................................... 90,617 92,180 95,232
Other ....................................... 110,424 48,787 44,215
Total ......................................... 1,017,325 968,927 940,399 Cost of sales, operations,
selling and administration........ 991,155 895,930 867,945
Earnings before the following: . 26,170 72,997 72,454 Depreciation of capital assets .. 19,311 19,682 22,223
Amortization of intangible assets 10,679 8,326 5,638
Capital assets write-off - 1,086 - Amortization of pre-opening store costs - - -
EBIT(1) ...................................... (3,820) 43,903 44,593
Interest on long-term debt and financing charges .............. 212 214 309
Interest on current debt ............. (567) (333) (1,443)
Dilution gain on reduction of ownership in subsidiary………... (3,915) (3,019) -
Deemed disposition of goodwill - 891 -
Earnings before income taxes & non-controlling interest ...........
450 46,150 45,727
Income tax expense (recovery) . 2,682 12,537 15,077
Non-controlling interest……... (13,578) (1,310) - Net earnings ............................. 11,346 34,923 30,650
Earnings per share (basic) ........ 0.46 1.42 1.24
Earnings per share (diluted) ...... 0.45 1.39 1.21 Weighted average number of
common shares outstanding... 24,874 24,550 24,675
Total Assets .............................. 516,180 519,842 487,506
Total Long-Term Debt ............. 3,285 3,037 5,006
(1) Indigo defines EBIT as earnings before interest, taxes, non-recurring expenses and non-controlling interest. Management of Indigo believes that
EBIT is an important measure in evaluating the performance of the Company. However, EBIT is not a recognized earnings measure under Canadian
GAAP and does not have a standardized meaning prescribed by Canadian GAAP. Therefore, EBIT may not be comparable to similar measures
presented by other issuers. Investors are cautioned that EBIT should not be construed as an alternative to net income or loss determined in accordance
with Canadian GAAP as an indicator of Indigo’s performance or to cash flows from operating activities as a measure of liquidity and cash flows. The
following table reconciles EBIT to earnings before income taxes and non-controlling interest, based on the historical financial statements of Indigo
for the periods indicated, in thousands of Canadian dollars, presented in accordance with Canadian GAAP:
52-week period ended
April 2, 2011
53-week period ended
April 3, 2010
52-week period ended
March 28, 2009
(in thousands of Canadian dollars)
Earnings before income taxes and non-controlling interest ............................ 450 46,150 45,727
add back:
Interest .................................................................................................. (355) (119) (1,134)
Non-recurring expenses ......................................................................... (3,915) (2,128) -
EBIT .............................................................................................................. (3,820) 43,903 44,593
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APPENDIX A
Audit Committee Charter
1. Purpose
The primary function of the Audit Committee is to assist the Board of Directors in fulfilling its
oversight responsibilities by reviewing: the financial information that will be provided to the
shareholders and others, the systems of internal controls which management and the Board of
Directors have established, and the Company’s and its subsidiaries’ audit and financial reporting
process.
The independent accountants’ ultimate responsibility is to the Board of Directors and the Audit
Committee, as representatives of the shareholders. These representatives have the ultimate authority
to evaluate and, where appropriate, recommend replacement of the external auditors.
The Audit Committee will primarily fulfill these responsibilities by carrying out the activities
enumerated in Section 5 of this Charter. The Audit Committee will, at all times, be given full access
to the Company’s management and records and to the external auditors as necessary to carry out these
responsibilities.
2. Composition of Committee
The Audit Committee shall be comprised of four directors, each of whom will be an independent, as
contemplated by National Instrument 52-110 - Audit Committees.
All members of the Committee shall be financially literate and thus be able to read and understand
fundamental financial statements including a balance sheet, an income statement and a cash flow
statement that presents a breadth and level of complexity of accounting issues that are generally
comparable to the breadth and complexity of the issues that can reasonably be expected to be raised
by the issuer’s financial statements.
3. Committee Meetings
The Audit Committee will meet on a quarterly basis and will hold special meetings as circumstances
require. The timing of the meetings shall be determined by the Audit Committee.
At all Audit Committee meetings a majority of the members shall constitute a quorum.
4. Relationship with External Auditors
The external auditor shall report directly to the Audit Committee.
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5. Responsibilities and Duties
To fulfill its responsibilities and duties, the Audit Committee shall:
review the accounting principles, policies and practices followed by the Company and its
subsidiaries in accounting for and reporting its financial results of operations;
review the Company’s audited annual consolidated financial statements and the unaudited
quarterly financial statements and recommend to the Board for approval prior to publicly
disclosing this information. Also review and recommend to the Board for approval any
accompanying related documents such as the Annual Information Form or equivalent
filings and the Management’s Discussion and Analysis prior to publicly disclosing this
information;
review the annual and interim draft earnings press releases quarterly and recommend to the
Board for approval prior to publicly disclosing this information;
satisfy itself that adequate procedures are in place for the review of the Company’s public
disclosure of financial information extracted or derived from the Company’s financial
statements and periodically assess the adequacy of those procedures;
recommend to the Board of Directors the selection of the external auditors in connection
with preparing or issuing an auditor’s report or with performing other audit, review or
attesting services for the Company;
recommend to the Board of Directors the compensation of the external auditors;
oversee the work of the external auditors engaged for the purpose of preparing or issuing
an auditor’s report or performing other audit, review or attest services for the Company,
including the resolution of disagreements between management and the external auditors
regarding financial reporting;
obtain, on an annual, basis a formal written statement from the external auditors
delineating the relationship between the audit firm and the Company, and review and
discuss with the external auditors such relationship to determine the “independence” of the
auditors;
review any management letter prepared by the external auditors concerning the Company’s
internal financial controls, record keeping and other matters and management’s response
thereto;
discuss with the external auditors their views about the quality of the implementation of
Canadian Generally Accepted Accounting Principles, with a particular focus on the
accounting estimates and judgments made by management and management’s selection of
accounting principles. Meet in private with appropriate members of management and
separately with the external auditors on a regular basis to share perceptions on these
matters, discuss any potential concerns and agree upon appropriate action plans. Review
with the external auditors their views on the adequacy of the Company’s financial
personnel;
approve the scope of the annual audit, the audit plan, the access granted to the Company’s
records and the co-operation of management in any audit and review function;
review the effectiveness of the independent audit effort, including approval of the fees
charged in connection with, the annual audit, any quarterly reviews and any non-audit
services being provided;
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assess the effectiveness of the working relationship of the external auditors with
management;
review the financial risk management policies followed by the Company in operating its
business activities and the completeness and fairness of any disclosure thereof. Review the
use of derivative financial instruments by the Company;
review and approve any management decision relating to any potential need for internal
auditing, including whether this function should be outsourced and if such function is
outsourced, approve the supplier of such service;
establish procedures for (i) the receipt, retention and treatment of complaints received by
the Company regarding accounting, internal accounting controls, or auditing matters; and
(ii) the confidential, anonymous submission by employees of the Company of concerns
regarding questionable accounting or auditing matters;
review and approve the Company’s hiring policies regarding partners, employees and
former partners and employees of the present and former external auditors of the
Company;
the Committee will determine the nature of non-audit services the external auditors are
prohibited from providing to the Company. The Committee will pre-approve all non-audit
services provided by the external auditors to the Company;
review annually this Audit Committee Charter for adequacy and recommend any changes
to the Board;
report to the Board on the major items covered at each Audit Committee meeting and make
recommendations to the Board and management concerning these matters. Annually report
to the Board on the effectiveness of the Audit Committee; and
perform any other activities consistent with this Charter, the Company’s Bylaws and
governing law as the Committee or the Board deems necessary or appropriate.
6. Authority
The Audit Committee has the authority:
(a) to engage independent counsel and other advisors as it determines necessary to carry out its
duties;
(b) to set and pay the compensation for any advisors employed by the audit committee; and
(c) to communicate directly with the internal and external auditors.